August 2010

To keep things simple for readers unfamiliar with the Hidden Pivot Method, in  today's commentary I overlooked the fact that the rally did indeed exceed the required "internal" and "external" peaks needed to create an impulse leg on the daily chart. That's bullish, of course, but it would become significantly more bullish if the surge continues for another day, surpassing a second "external" peak in the process.

A hundred points here, a hundred points there, and pretty soon you’re talking about a real rally. Yesterday’s 208-point thrust in the Dow didn’t quite qualify as a powerhouse, however, since it failed to exceed a peak “along the wall” of the daily chart.  That quirky little rule has saved us time and again from jumping headlong into trouble, since it provides a generally trustworthy benchmark for distinguishing bogus rallies from the real McCoy.  The chart below shows the peak that will need to be impaled by the end of today’s session in order to signal the kind of buying power that’s likely to last more than a mere day or two. According to the Hidden Pivot Method that we used to trade and forecast, a push above 10719 today could sufficiently re-energize the bull trend to keep it going for the whole month of August.  As you can see, it won’t take much, since the as-yet-unconquered peak lies within spitting distance of yesterday’s close.  How close? Exactly 44.48 points, which is about how far the Industrial Average leaps, on average, in the first 30 seconds of sessions that have opened on a short-squeeze gap. Yesterday’s squeeze goosed the Indoos 135 points in the first two minutes, locking out all but a relative handful of true believers who went home long on Friday. We know there couldn’t have been many of them, relatively speaking, since the broad averages would not have soared with such devil-may-care lightness if they had been burdened by profit-takers the whole way up. The news helped too – as when has it not? -- with Eurobanks reporting an upbeat second quarter and an unexpected climb in June construction spending.  We’ve learned to take these ostensibly bullish statistical outliers with a grain of salt, although Wall Street

Gold has backed off a small precipice, rallying from within just 0.60 of a well-advertised Hidden Pivot support at 1155.00.  Look at the accompanying chart, however, and you'll see that bulls will have their work cut out for them if they want to restore a positive look to the lesser charts. For starters, any rally this week will need to take on external peak #1, and at least one peak "along the wall" (#2=1206.70).  I'll wait to see what Monday brings before I exhort you to get excited. (Note:  We'll move to the December contract starting tomorrow. The corresponding peaks lie, respectively, at 1207.50 and 1210.70.)

There seemed to be little news to move the markets Sunday night, but we wouldn't put it past DaBoyz to short-squeeze stocks with whatever gossip remains from Chelsea Clinton's wedding. That event appears to have been the news media's sole concern over the weekend, and we cannot yet imagine what gripping new story will finally knock it off the front page.  But if a movie as rotten as "Inception" can top the box office for a third straight weekend, then the wedding's hold on America could conceivably last till Labor Day.

For all of the jacking around on Friday, buyers were unable to create even a single impulse leg on the lowly 15-minute chart. The day's rallies, such as they were, exceeded one peak but failed to muster the required second, and so we are inclined to see this modest upwardliness as just noise and no more. Even so, to avoid being caught unawares we must monitor two prior peaks on the daily chart carefully, since any unpaused rally that exceeds both would presage more bullish action well into autumn. The peaks lie, respectively, at 1129.50 and 1142.75, so it wouldn't take much to reinvigorate the bear rally begun nearly a month ago.

Silver's ostensibly sharp rally on Friday, like Gold's, looks mediocre even on the 15-minute chart.  We should want to see a push this week to at least 18.680 before we take serious encouragement, since that's where a bullish impulse leg would be generated on the lesser charts. As always, the number of prior peaks surpassed without a pause will be crucial to our assessment of strength (or weakness) in the underlying vehicle.

We are short the August 102/August 98 put spread in a 1:2 ratio three times @ 0.76.  It's time to write off the likely trading loss of $228, even though we'll continue to carry the position toward expiration. In retrospect, the loss came from my having missed exiting some long puts on July 7. We had a profit of nearly $1000 in the position at one time and I should have suggested nailing some of it down. Indeed, there will never be a good excuse for not taking at least a partial profit when puts "come home" as they did for us, however briefly (which in the world of put options means three days, tops).

The response to Mario Cavolo’s glowing take on China and the global economy was eye-opening, to say the least. It’s not hard to understand why someone who lives and works in China, as Mario does, might believe that the country’s economic prospects are so spectacular as to all but preclude the possibility of a deflationary depression elsewhere in the world. We’re not so sure ourselves and have a few things to say about it below. But we were nonetheless persuaded by Mario’s argument, and by comments made by others in the Rick’s Picks forum, that China is doing many important things right, economically speaking. Some Westerners don’t come easily to this notion, since it requires one to put aside very troubling concerns about China’s repressive, authoritarian political regime; for it is both unfortunate and undeniable that dissidents do indeed disappear in the middle of the night, never to return; and that “troublemakers” such as the Falun Gong, a Taoist sect, have indeed been tortured and expelled from civil life. Even so, and seemingly paradoxically, China’s political leaders seem to have the long-term well-being of the Chinese people foremost in mind when it comes to managing the economy. On this point, we found the following comment in the forum, by “Adiehua,” particularly illuminating: “Like most of the correspondents here, I come from a background that prizes democracy and freedom,” he wrote. “However, I consciously try to avoid the trap of believing that it is the only system. The popular belief that China is a somewhat totalitarian state is erroneous. It is authoritarian but the Chinese have had various versions of authoritarianism for 2000 years. To ask them to adopt Ben Franklin’s philosophies in a heartbeat is not practical. Chinese Solutions “Nearly everyone I know in China is acutely aware of the

Because T-Bonds have been dancing smoothly with Hidden Pivots lately, we should assume they are on their way up to at least 130^08 now that they've exceeded that Hidden Pivot's sibling midpoint at 128^05 on a closing basis.  Accordingly, traders should position from the long side -- and please note that camouflage opportunities have been cropping up on charts up to the 30-minute level. Use of the single-bar 'C' would have been the key to any such trade that panned out.